7 July 1998 Income Tax Severed Letter 9826023 - Supplemental pension arrangement

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

SUMMARY: Supplemental pension arrangement—ITA-248(1), 56(1)(a)(l), 12(4)—Advance income tax ruling - Whether an unfunded supplemental pension arrangement results in current taxation.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère. PRINCIPAL ISSUES: Whether an unfunded supplemental pension arrangement results in current taxation.

POSITION: No.

REASONS: The plan provides: for maintaining notional accounts, funds will not be held in trust for the benefits of participants, participants will have no right to the assets, and assets are available to employer's general creditors. Creating such a plan is not considered to be a taxable event (no benefit, RCA or SDA). The pension benefits are taxable when received.

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Attention: xxxxxxxxxx XXXXXXXXXX, 1998 Dear Sirs: Re: Request for Advance Tax Ruling Supplemental Pension Arrangement - xxxxxxxxxx

This is in reply to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the information provided in your letter of XXXXXXXXXX, and during our related telephone conversations (XXXXXXXXXX). DEFINITIONS AND ABBREVIATIONS In this letter, unless otherwise expressly stated or the context otherwise requires: “Act” means the CanadianIncome Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof, and unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act; “Opco” means XXXXXXXXXX “Participant” means an employee of Opco who is a member of the Supplemental Plan (as defined below); “Plan” means Opco's group RRSP or Opco's RPP, as the case may be; “RCA” (or “retirement compensation arrangement “) has the meaning assigned by subsection 248(1); “RPP” (or “registered pension plan”) has the meaning assigned by subsection 248(1); “RRSP” (or “registered retirement savings plan”) has the meaning assigned by subsection 248(1); “SDA” (or “salary deferral arrangement”) has the meaning assigned by subsection 248(1); “Supplemental Plan” means the proposed Supplemental Pension Arrangement of Opco; RELEVANT FACTS 1. Opco's address is XXXXXXXXXX.

Opco's Tax account number is XXXXXXXXXX. Opco is a registered charity which deals with the XXXXXXXXXX Tax Services Office and files its tax returns with the XXXXXXXXXX Tax Centre. 2. Opco maintains the Plan for all its employees.

3. The Plan is a money purchase plan. Each employee's contributions under the Plan for a year (the “Employee's Contributions”) represents an amount equal to a percentage as elected by the member, that is not less than XXXXXXXXXX and not more than XXXXXXXXXX of the employee's annual earnings. Such contributions are payable to either Opco's group RRSP or Opco's RPP. Opco's contributions under the Plan for a year on behalf of an employee (“Opco Contributions under the Plan”) represent the amount of the Employee's Contributions, subject to paragraph 4 below.

4. Income tax rules applicable to a RPP or RRSP restrict the amount of contributions that may be made to the Plan. Because of this limit, Opco will be restricted in the amount of contributions that it can make to the Plan on behalf of higher income individuals.

PROPOSED TRANSACTIONS 5. Although we have not been provided with a copy of it, you have advised that the Supplemental Plan will have the following terms: (a) A notional contribution account (“Account”) will be established in respect of each Participant. A Participant's Account will be credited with the difference between the contributions Opco would make under the Plan on behalf of the Participant, if there were no contribution limits imposed by the Act or the Income Tax Regulations, and the actual Opco Contributions under the Plan (“Opco Contributions under the Supplemental Plan”)

(b) Opco will set aside and invest sums of money equal to Opco Contributions under the Supplemental Plan. These earmarked assets will continue to belong to Opco and Participants will not have any direct claims against these assets. In particular, the earmarked assets will not be held in trust for the benefit of Participants and no assets of Opco have been or will be set aside in the name of a Participant.

(c) All the assets relevant to the Supplemental Plan will be available for the general creditors of Opco.

(d) The Supplemental Plan will operate as a money purchase plan (although, as described above, there will be no assets held in trust for the purposes of the Supplemental Plan). A Participant's Account will be adjusted annually by reference to the investment experience of the earmarked assets, net of the Supplemental Plan's administrative expenses. Normally, the adjustments will consist of credits to the Participant's Account, although conceivably it the earmarked assets are heavily invested in equities or long term bonds, there could be a loss for a year. In this case, the Participant's Account would be reduced by its share of the loss.

(e) Participants will be provided with statements each year setting out the amounts added to and deducted from their Accounts.

(f) If a Participant retires on or after reaching normal retirement age for the purposes of the Supplemental Plan, Opco will pay an amount equal to the balance in the Participant's Account to the Participant in equal annual installments over a period of not more than five (5) years; provided that, if the Participant elects prior to his or her retirement, Opco will pay the amount in equal annual installments over the number of years designated by the member, not to be fewer than two. Any payment made by Opco to a Participant under the Supplemental Plan will be subject to income tax withholding.

(g) On termination (including early retirement) prior to normal retirement, a Participant will be entitled to receive from Opco the balance in the Participant's Account either in a lump sum or in equal annual payments over a period of not more than five (5) years. The Participant will be required to elect the form of payment prior to the effective date of termination. A terminating Participant will be entitled to elect a deferred commencement date for the commencement of the annual payments. If a Participant terminates before age 55 and elects the annual payment option, the earliest commencement date for the annual payments will be age 55. Where the commencement of the annual payments is postponed after the Participant's termination, the Participant's Account will continue to be maintained until the commencement of the annual payments. Any payment made by Opco to a Participant under the Supplemental Plan will be subject to income tax withholding.

(h) If a Participant dies before termination of employment and has designated his or her spouse as the beneficiary under the Supplemental Plan, the spouse will be entitled to receive from Opco the balance in the Participant's Account either in a lump sum or in equal annual payments over a period of not more than five (5) years. The spouse will be required to elect the form of payment before any payments are made by Opco. If there is a non-spouse beneficiary, then Opco will make a lump sum payment equal to the balance in the Participant '5 Account to such beneficiary. Any payment made by Opco to a Participant's beneficiary under the Supplemental Plan will be subject to income tax withholding.

PURPOSE OF THE PROPOSED TRANSACTIONS 6. Opco proposes to establish the Supplemental Plan for the benefit of members of the executive group whose income level limits their contribution to the Plan. OTHER INFORMATION 7. To the best of your knowledge and that of Opco none of the issues in respect of which rulings are herein requested is: (a) in an earlier return of Opco or a related person,

(b) being considered by a tax services office or tax centre in connection with a previously filed tax return of Opco,

(c) under objection by Opco or a related person,

(d) before the courts or, it a judgment has been issued, the time limit for appeal to a higher court has not expired, and

(e) the subject of a ruling previously issued by the Income Tax Rulings and Interpretations Directorate.

8. To the best of your knowledge and Opco's knowledge, this request for an advance income tax ruling contains all the relevant facts and provides a full and fair presentation of the proposed arrangement in respect of the rulings sought.

RULINGS GIVEN Provided the above statement of facts and proposed transactions are accurate and constitute a complete disclosure of all relevant facts and provided the transactions are completed as proposed, that the proposed Supplemental Plan is established in the manner described in paragraphs 5(a) through (h) above, we rule as follows: A. The Supplemental Plan will not constitute a SDA.

B. The Supplemental Plan will not constitute a RCA and consequently the provisions of Part XI.3 will not be applicable with respect to said Supplemental Plan.

C. Subsection 12(4) will not apply to a Participant to require any amount to be included in computing the Participant's income for a year as interest with respect to the balance in the Participant's Account.

D. Each equal annual payment (inclusive of withholdings thereon) made by Opco to a Participant, or after the death of the Participant to the Participant's spouse, as the case may be, under the Supplemental Plan, will be included in the income of the recipient in the year it is received as a superannuation or pension benefit pursuant to subparagraph 56(1) (a) (i)

E. No amount will be included in the income of a Participant under subsection 5(1), paragraph 6(1)(a) or paragraph 56(1)(a) as a result of, in and by itself, the Participant's participation in the Supplemental Plan.

These rulings are given subject to the general limitations and qualifications set forth in information Circular 70-6R3 dated December 30, 1996, issued by Revenue Canada Taxation, and are binding provided the proposed transactions are completed and effective within six months of the date of this letter. Yours truly,

for Director Financial Industries Division Income Tax Rulings and Interpretations Directorate Policy and Legislation Branch